Income Tax Appellate Tribunal - Hyderabad
Energy Solutions Internation Inc, ... vs Assessee on 27 November, 2015
IN THE INCOME TAX APPELLATE TRIBUNAL
HYDERABAD BENCH "B", HYDERABAD
BEFORE SHRI P. MADHAVI DEVI, JUDICIAL MEMBER
AND SHRI S. RIFAUR RAHMAN, ACCOUNTANT MEMBER
ITA No. 456/Hyd/2015
Assessment Year: 2011-12
Energy Solutions International vs. Dy. Commissioner of Income-
Inc., Texas, USA. tax - 1, International Taxation,
Hyderabad.
PAN - AACCE 6415G
(Appellant) (Respondent)
Assessee by : Shri Sharat Rao
Revenue by : Shri Siri Kumar
Date of hearing 13-10-2015
Date of pronouncement 27-11-2015
O RDE R
PER S. RIFAUR RAHMAN, A.M.:
This appeal by assessee is directed against assessment order passed u/s 143(3) read with section 144C of the Income-tax Act (Act) for the AY 2011-12.
2. Briefly the facts of the case are that Energy Solutions International Inc, the assessee, is a company incorporated in the United States of America ("USA") and a tax resident of USA. The asseessee is a leading global supplier of innovative decision support software products such as Pipe Line Studio ("PLS"), Pipe Line Manager ("PLM") and Pipe Line Transporter ("PL T") that enhance and integrate operational efficiency, commercial profitability and safety across pipelines as well as the energy transportation, storage, marketing and delivery functions.
2 ITA No. 456 /Hyd/2015Energy Solutions International Inc., 2.1 The assessee has, during the year under consideration, sold the above mentioned software products to Energy Solutions International (India) Private Limited ["ESI India"], a group entity incorporated in India, who in turn sells the same to its customers in India.
• The customers, based in India, place a purchase order with ESI India, which inter alia consists of:
a) Supply of software (either PLS/PLM/PL T), generally used by oil/gas manufacturing/distribution companies to track the oil flow, leak detection, and management of inventory across their distribution network from a central location; and
b) Other services comprising of:
- Installation/commissioning/training of such software;
- Support services, post implementation; and
- Parameters and specifications required in the software.
* ESI India, in turn, based on above order from the customer ('end users'), places back-to-back purchase orders on the assessee.
* ESI India either imports software CDs, or downloads the software; and subsequently installs it on the customer's machine.
• The hardware key or the soft key in relation to the above software is directly provided by the appellant to the users/ clients in India.3 ITA No. 456 /Hyd/2015
Energy Solutions International Inc., • Further, the End User License Agreement ('EULA'), needs to be accepted by the customer directly before installing the software on its machine.
• ESI India does not have any access to either the source code or into the actual programming codes present in the software product.
• Neither ESI India nor the end user customers in India obtain any right to use or make copies of the software.
• The assessee is a distributor simplicitor, distributing software for margin.
2.2 The assessee filed its return of income, relevant to the Assessment Year ("AY") 2011-12, on December 18, 2012 declaring "NIL" taxable income under the Act. The case was selected for scrutiny under CASS. The draft assessment order was passed by the learned Assessing Officer ("AO") under section 144C of the Act on March 7, 2014, treating the payment towards the sale of software in the nature of Royalty taxable at the rate of 10 percent as applicable under the ambit of the provisions of DTM and applied surcharge at the rate of 7.5 percent on the income so computed. Based on the same an upward adjustment to the tune of Rs 1,46,05,511 was made to the income of the assessee.
3. Aggrieved by the draft assessment order, the assessee approached the Hon'ble Dispute Resolution Panel ("DRP"). The Hon'ble DRP had, in its directions dated December 8, 2014, observed that in the case of "ESI India" in AY 2007-08 and AY 2008-09, the Hon'ble ITAT, Hyderabad vide ITA No. 1736/Hyd/2012, dtd.
06/01/2012 restored the appeal back to the file of the AO to decide the same in accordance with law on the issue of payment to the "ESI US" as Royalty and whether "ESI India" is liable to deduct tax at source u/s 195. The AO has not decided the matter yet. DRP observed that it will have impact on the present case in hand. Since 4 ITA No. 456 /Hyd/2015 Energy Solutions International Inc., the matter has not reached the finality, DRP rejected the objections of the assessee.
3.1 Consequent to the directions of the Hon'ble DRP, the learned AO passed the final assessment order dated February 19, 2015 under section 143(3) read with section 144C of the Act, treating the payment towards sale of software as royalty. However, the rate of surcharge on the applicable tax was reduced to 2.5 percent as per the directions of the DRP.
4. Aggrieved by the final assessment order, the assessee is now in appeal before the Tribunal.
5. Vide Annexure 2, the assessee has raised 10 grounds of appeal and in Annexure 3, assessee has filed concise grounds, which are as follows:
"1. To delete the addition amounting to Rs. 1,46,05,511 made to the income of the assessee.
2. To hold that the income of the assessee towards the sale of software products is not in the nature of 'royalty' under the provisions of section 9(1)(vi) of the Income-tax Act, 1961 (the Act) as well as under the provisions of the DTAA between India and USA."
6. Before us, the ld. AR submitted that in the case of ESl lndia for AY 2007-08 and AY 2008-09, the learned AO has vide order dated February 23, 2015, after considering the facts involved with respect to the payments to the assessee towards purchase of software products, accepted the contentions of ESI India that such payments cannot be treated as royalty and deleted the disallowance for non-deduction of tax at source under section 40(a)(i) of the Act. The learned AO had, while holding so, took into account the ratio laid down by the Hon'ble Delhi High Court in the case of Dynamic Vertical Software India Private Limited (332 ITR 222) as per the directions of the Hon'ble Tribunal. Ld. AR, therefore, contended that since the facts in the AY 5 ITA No. 456 /Hyd/2015 Energy Solutions International Inc., under consideration are identical to that AY 2007-08 and 2008-09, the AO was wrong in treating the payments as royalty.
7. The ld. DR, on the other hand, relied upon the orders of revenue authorities.
8. We have considered the submissions of both the parties and perused the material on record. As pointed out by the ld. AR, the orders passed by AO in 2007-08 and 2008-09 have been placed in the paper book vide pages 114 to 122, wherein the AO accepted the contentions of ESI India that such payments cannot be treated as royalty and deleted the disallowance for non-deduction of tax at source under section 40(a)(i) of the Act. The assessee "ESI US" sold the software to "ESI India" and in the assessment of "ESI India", it is the payments are treated as towards the purchase of software and not as payment towards Royalty. The principle needs to be applied consistently. In our view, in the hands of the Indian company, when it is not treated as Royalty, then, the same consideration should also be extended to the same transaction in the case of "AE" i.e. "ESI US". In the present case, income towards sale of software to the Indian "AE" cannot be treated as "Royalty". Hence, the addition made by the AO towards Royalty is deleted.
9. In the result, appeal of assessee is allowed.
Pronounced in the open court on 27 th November, 2015.
Sd/- Sd/-
(P. MADHAVI DEVI) (S. RIFAUR RAHMAN)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Hyderabad, Dated: 27 th November, 2015
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ITA No. 456 /Hyd/2015
Energy Solutions International Inc.,
Copy to:-
1) Energy Solutions International Inc, C/o BMR & Associates LLP 31, Sudha Centre, 2 n d Floor, Dr. Radhakrishnan Salai, Mylapore, Chennai - 600 004.
2) DCIT - 1 International Taxation, Hyderabad 3 DRP, Hyderabad
4) DIT, Hyderabad
5) The Departmental Representative, I.T.A.T., Hyderabad.